A pair of recent court decisions in San Diego—Patz v. City of San Diego and Coziahr v. Otay Water District—have thrust California’s Proposition 218 back into the spotlight. But what is this proposition, and how does it affect our water bills and the state’s water providers? As Californians grow increasingly concerned about affordability, we asked Dave Owen, a professor at UC Law San Francisco, to explain how Prop 218 and water rates are connected.

First, what is Prop 218, and what does it do?

Proposition 218 is a ballot initiative that was enacted by voters in 1996. It was part of a series of ballot initiatives that were designed to limit the ability of local governments to raise taxes. It amended California’s constitution, which means that it can only be changed by amending the constitution again.

Prop 218 matters for water because it imposes limitations on fees. It says that property-related fees cannot exceed the cost of providing the relevant service to the landowner paying that fee. In other words, everybody is supposed to pay fees in proportion to the cost of what they get in return. And you cannot use local government fees for things like enhancing general revenue, redistributing wealth, or for the primary purpose of providing financial incentives.

One interesting note is that Prop 218 doesn’t apply to private companies that supply water. Those companies provide a small but non-trivial amount of service to urban users in California, and they are required by law to use rate structures that protect low-income users. In other words, something that we require of private companies is legally iffy for public entities.

How does this proposition affect water affordability and conservation efforts?

If you’re a water district or local government setting water rates, you typically have a couple of goals. The most important goal is to bring in enough revenue to fund your operations. But other key goals usually include ensuring affordability and promoting water conservation.

For years, policymakers and water managers have agreed it’s a good idea to subsidize rates for the relatively small amount of water that every household needs for things like drinking, bathing, and cooking. This helps customers who may have trouble paying a water bill.

But remember that Prop 218 says that fees must reflect the cost of providing service to people. Giving low-volume water users water at a free or subsidized rate is inconsistent with Prop 218. In fact, for some providers, providing water gets cheaper as volumes increase because of economies of scale.

Water conservation is also a Prop 218 issue because pricing high water use at higher rates encourages people to use less water, which is a shared goal in California. Successful conservation means there’s more water to go around, including for the environment. However, under Prop 218, in order to charge higher rates to those who use a lot of water, a provider can’t just say that water conservation has societal benefits. Instead, the provider must show that higher-volume users are more expensive to serve. That is not always possible.

Prop 218 also requires water providers to do sophisticated economic and accounting analysis to justify their water rates. This is a burden on local government, because such analysis is not cheap. Even if they do the analysis, they may get challenged in the courts and lose.

The California Legislature has passed several measures, most recently AB 1827 (2023–24), to give local agencies guidance.

These issues came up recently in court cases in San Diego. What are the implications for things like rate-setting and water conservation?

The most recent decision came out of San Diego’s Fourth District Court of Appeal on July 30. It was the second decision from two related cases. In both decisions, the courts have rejected tiered rates that cost more if you use more water and ordered money—$79 million in the Patz case—refunded to ratepayers.

From a local government and water provider’s perspective, this decision is scary on multiple levels. First, because San Diego is a big and well-resourced city, it put a lot of work into justifying its water rates—and it still lost. Now the city has a massive liability. San Diego will have to credit a huge amount to ratepayers, which will almost certainly be funded by cost increases to other ratepayers.

The courts have been wrestling with a big question: how good is good enough for calculating rates? You can’t easily calculate the cost for every customer. And how do you deal with the differences between single-family homes, apartments, business, and agriculture? A lot of art, as well as math, goes into deciding which costs go to whom.

Until recently, courts sometimes ruled against local governments, but they also understood that calculations can’t be perfect, and reasonable people might differ about methodology. In the latest decisions, that language is gone: the court says the water provider has to get it right. This seems to be setting a very high standard for the level of calculations. Cities and other providers must be looking at these decisions and wondering how to meet that standard.

Final thoughts?

In the aftermath of these court decisions, you’ll probably see some public water providers stop using tiered rates because it’s too risky, and they’ll charge the same rate for everybody. Flat rates have an intuitive appeal, but you could see legal attacks on flat rates as well. There’s no safe haven for public water providers here.

There are a few ways forward. First, the California Supreme Court may decide to give water agencies a little more leeway in setting rates. A ballot initiative could amend the state constitution to make tiered water rates constitutional. Finally, the state could impose a tax on water consumption and use some revenues to offset water costs for low- and moderate-income users. With a two-thirds vote, a city also could impose a new tax on water consumption, and the tax could include exemptions for low-income users and could generate revenues to support conservation projects. Proposition 218 has implications for water conservation and affordability, and it’s worth seeking a solution.